Commentary: "family firms and social responsibility: preliminary evidence from the S&P 500".

This commentary focuses on four themes: (1) empirical relevance of corporate social responsibility (CSR) in family firms; (2) complementary theoretical explanations to CSR behavior in family firms; (3) the need for stringent definitions in family business research; and (4) the potential for dual causality between family ownership and more generous CSR policies. Specifically, I argue that agency theory can lead to additional valuable insights about CSR in family firms.

Introduction

As family business research is expanding and maturing, we are seeing a wider range of topics explored and theories applied. The article "Family firms and social responsibility: Preliminary evidence from the S&P 500" by Dyer and Whetten (2005) represents an effort in this direction. These authors explore if corporate social responsibility (CSR) is approached differently in family vs. nonfamily firms using theories on organizational identity, image, and identification. CSR is a well-researched area, and theories on organization identity have been used to explain organizational phenomena in the past. However, as far as I am aware, this is the first time that these issues are approached in a family business context. Analyzing the 500 largest U.S. companies using data from Standard & Poor's S&P 500, they examine whether or not those companies controlled by families exhibit greater CSR than other companies. In a clever way, they draw on previous studies of the S&P 500 for definitions of family and nonfamily firms and for measures of CSR.

Central to their argument is that there are spillover effects between the family and their firm. Family values spill over on corporate values, bad publicity spills over from the firm to the family, and so on. Family businesses, therefore, are more likely to be more concerned about CSR and to exhibit a more positive CSR behavior. In the following discussions, I will offer comments on the article and suggestions for future research in the spirit of Dyer and Whetten along four themes. The themes are as follows: (1) empirical relevance of CSR in family firms; (2) complementary theoretical explanations to CSR behavior in family firms; (3) the need for stringent definitions in family business research; and (4) the potential for dual causality between family ownership and more generous CSR policies.

Relevance of CSR Research in Family vs. Nonfamily Firms

The topic is nontraditional in the family business context. An obvious question is if it is important and adds value. My own country, Sweden, provides a case in point, suggesting that the article is highly relevant and linked to a wider debate on the consequences of corporate ownership structures. In the 1970s, Swedish capitalist families were under a lot of pressure. Following the left-wing movement that swept across Europe, claims were made that these families made excessive financial gains at the expense of their workers. In particular, the Wallenberg family, which controlled companies such as Electrolux, Saab, ASEA (later ABB), and Ericsson, was criticized. Some people became so engaged that they even wrote songs about it! The social democrats were seriously discussing the socialization of the commercial banks, the largest one of which is controlled by the Wallenberg family.

Since then, much has changed. Apart from changes in political views, ownership of the stock exchange has shifted dramatically. Institutional investors now dominate the stock exchange, including a rapid increase of international institutional capital. Currently, worries are quite different. In the media, institutional owners are viewed as ruthless short-term investors, only interested in the next quarterly report, ready to shift their investments or close plants at a whim. The major problem is that these investors are faceless so it is impossible to hold them accountable for the consequences of their decisions. Industrial families, including Wallenberg, on the other hand, are now viewed as responsible owners interested in the long-term viability of the firms they control. If they engage in a behavior that is not considered socially desirable, they are pressed to defend their actions in the media. Taken together, this should guarantee that they not only act in their best interest but also in the interest of their workers and society at large. Although the term CSR is rarely used explicitly in the general debate, clearly, it is a case of assuming greater CSR from family-controlled firms than from firms controlled by institutional investors.

Complementary Theoretical Explanations to CSR in Family Firms

With this background, the article by Dyer and Whetten (2006) is very timely. In developing the conceptual argument, they rely on several theories that address family ownership as well as family management and their relationship with CSR. While these theories indeed offer plausible explanations as to why family firms should exhibit greater CSR, they do not directly address what has been the major concern in the Swedish debate, namely the possibility of holding owners accountable for the outcomes of their decisions and how this influences CSR.

In many ways, the Swedish discussion is in line with the logic of agency theory (cf. Jensen & Meckling, 1976). According to this theory, monitoring and the possibility of enforcing sanctions are used as means of restricting opportunistic behavior. If either of these elements is missing so that behavior is not monitored, or if it is impossible to enforce sanctions in case of unwanted behavior, opportunism will result. Institutional owners are faceless, represented by hired company officials, and their investments are liquid. Attempts to enforce sanctions against them is difficult and somewhat like squeezing a wet bar of soap. Once you start squeezing, it will escape your grip and end up elsewhere. Owners of family firms, on the other hand, have their wealth tied to particular firms for the long term and are represented by easily identifiable, and often well-known, family members. Here, public sanctions can be more easily enforced. In particular, it is possible to influence the reputation of the family. As Dyer and Whetten (2006) explain, reputation is important to family firms, and family firms are likely to invest resources in areas such as CSR to build and maintain a good reputation. Therefore, according to agency theory logic, the threat of public sanctions influencing the reputation of family owners may serve as a mechanism for ensuring that their firms do not behave opportunistically but invest more into CSR than firms controlled by institutional owners do.

Indeed, it cannot be the task of Dyer and Whetten to conduct research aimed at informing the Swedish debate on the pros and cons of institutional vs. family ownership, but I suspect that: (1) this debate is valid to a wide variety of countries including the United States and (2) that the theoretical logic of agency theory is applicable irrespective of national context. Therefore, I believe that it provides an alternative and valuable lens for formulating hypotheses and interpreting findings concerning differences between family owners and institutional owners relating to socially desirable vs. opportunistic behavior, including investments into CSR. More importantly, to a large extent, the findings by Dyer and Whetten (2005) are consistent with the agency theory logic. They find indications that family firms do not engage more in positive social initiatives but to a greater extent refrain from actions that could be regarded as socially irresponsible. Agency theory would predict exactly this--the risk of sanctions would curtail behavior that could lead to sanctions but would not necessarily affect behavior that could lead to more positive evaluations. Agency relationships within family firms have indeed been a popular topic in family business research (e.g., Schulze, Lubatkin, Dino, & Buchholtz, 2001), but not in relation to external stakeholders. This could provide an interesting avenue for extending the application of agency theory in future family business research.

Definitions and Effects on Results

Based on the previous discussions, we would expect the authors to find substantial differences between family and nonfamily firms. Well, did they? The empirical results seem to show that to some extent, family firms exhibit greater concerns for CSR, but the differences are not very substantial. Specifically, they find that family firms have fewer social concerns than nonfamily firms, but there are no differences between the two groups concerning positive initiatives. Let me speculate on why results may be weak. First, family business research has yet to come up with a robust and generally agreed-upon definition of what constitutes a family business. These authors have chosen an inclusive definition. If the founding family has any ownership left in the company, or if members of the founding family are still present on the board of directors, they qualify as family businesses. It would be interesting to know how a stricter definition of family business would influence the findings. For example, if a combination of the two criteria were used so that both ownership and board representation were required in order to qualify as a family business, I suspect that results would have been stronger.